LDP postpones tax reform

The Liberal Democratic Party-led coalition said Thursday that it would push for “drastic tax reform” towards the end of next year, effectively postponing a controversial increase in sales tax until after difficult upper house elections next summer.

The LDP and Komeito, its junior coalition partner, released an outline of plans to overhaul a tax system that provides the government with less than two-thirds of its annual expenditure.

“We will work so that we will be able to realise a drastic reform in the tax system, including the consumption tax, in around fiscal 2007,” it said. The tax burden should be “equally shared among all generations”, it added, alluding to mounting pressures on the social security system resulting from Japan’s rapidly ageing society.

Takahira Ogawa, primary credit analyst for Japan at Standard & Poor’s, the ratings agency, said the administration of Shinzo Abe was committed to fiscal consolidation but not yet strong enough to push through what he said was a vital increase in sales tax. Attempts to raise sales tax, now just 5 per cent, have in the past proved politically disastrous.

Mr Ogawa said: “Abe might not be able to do all he wants,” adding that structural change was unlikely until after next summer’s upper house elections were safely over.

Thursday’s tax outline contained some tax breaks for business, including a one-year extension of capital gains cuts on share sales and dividend income. Companies will also be able to write off depreciation costs as tax-exempt expenses at a faster pace, bringing Japan into line with international norms.

However, the outline made no mention of corporate tax cuts, something the powerful Keidanren business lobby has been pushing for. One government official knowledgeable on tax issues said: “Keidanren was demanding too much. To make a tax change now [when companies are making record profits] would look like favouring corporations rather than ordinary people.”

On the issue of tax treatment of all-share mergers involving foreign companies, the LDP said it would allow tax-deferral in “most reasonable cases”, according to an official. The assurance, which will be written into tax regulations, is unlikely to satisfy foreign business groups, which have been pressing for a wholesale change of the law.

The Keidanren says new regulations will allow foreign companies to avoid tax by setting up “paper companies”. Foreign lobby groups, including the American Chamber of Commerce, say that so-called “paper companies” are necessary to comply with new regulations on “triangular mergers”, which allow companies to make acquisitons by swapping shares.

A member of the LDP’s tax committee said the party had rejected Keidanren’s basic position. “Most cases will be admitted for tax deferrals,” he said.

However, one foreign expert said a change at the regulatory, rather than the legislative level, was unsatisfactory. It would allow the Japanese business lobby to claim almost any merger was “abusive”, he said, adding that it was a setback to the government’s stated aim of encouraging more foreign investment by easing merger rules.

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